New to Practical Law?

We offer lawyers a better place to start.

Inaccurate valuations: Liability for losses

Resource type: Article

Status:
Published on 01-Jul-1996

Jurisdiction:
United Kingdom

The House of Lords has placed important restrictions on loses that can be claimed to arise from the provision of inaccurate information, an important extension to the limitations in the Caparo line of cases dealing with negligent mis-statements.

The House of Lords has placed important restrictions on the
losses that can be claimed arising from the provision of inaccurate
information.

Where the only duty (either in contract or tort) is to give
information, the level of damages is limited to the loss directly
attributable to the inaccuracy of the information and does not
extend to all the consequences attributable to it. Thus valuers who
had given inflated property valuations were only liable for an
amount up to the difference between the negligent valuation and the
true value at the time of the valuation, not for all losses
sustained by banks, some of which were attributable to the property
crash (South Australia Asset Management v York Montague Ltd.,
United Bank of Kuwait plc v Prudential Property Services Ltd,
Nykredit Mortgage Bank Ltd v Edward Erdman Group Ltd., The
Times Law Report, 24th June, 1996).

Valuation cases

All the cases involved negligent valuations given to banks, on
the basis of which they lent money secured on property. The
borrowers defaulted. The banks' losses could not be recovered from
the sale of the properties mainly because of the property
crash.

Most of the arguments in the cases focused on the level of
damages and in particular whether they should take into account
losses subsequently suffered solely as a result of the property
crash.

If the lenders had known the true value of the properties they
would not have lent. On this basis the Court of Appeal had ruled
that the lenders were entitled to their entire foreseeable loss
which would ordinarily be the difference between the sums lent and
the actual amount recovered.

The lenders sued the valuers under valuation contracts. It is
common practice in such cases to claim in both tort and contract;
the House of Lords' judgment sets out principles which are equally
applicable to both claims.

Duty of care

The Lords focused on whether the kind of loss the banks had
suffered was the type of loss in respect of which the valuers owed
the banks a duty of care. Lord Hoffmann cited Caparo Industries
PLC v Dickman [1990] 2 AC 605 in this connection.

Where valuers had simply provided information, they only owed a
duty for the direct consequences of the information being wrong
not for all losses suffered. A duty of care which imposed upon
a valuer responsibilities for losses which would have occurred even
if their valuation had been correct was not fair or reasonable. The
normal level of damages for a negligent valuation would therefore
be the difference between the negligent valuation and the correct
valuation or, if less, the lender's total loss.

The Lords distinguished between a duty to provide information
for the purpose of enabling someone else to decide upon a course of
action and a duty to advise someone as to what course of action to
take. In the latter case, the adviser must take reasonable care to
consider all the potential consequences of that course of
action. A market crash may be one of those potential consequences.
But where a duty is simply to provide information, the giver of the
information will, if negligent, only be responsible for the
foreseeableconsequences of the information being
wrong.

Extension of Caparo

The cases are an important extension of the limitations in the
Caparo line of cases. Caparo itself took a
restrictive approach to any extension of the duty of care beyond
the person(s) directly intended by the maker of a statement to rely
on it. These valuation cases restrict the types of loss in respect
of which a duty of care may be owed.

Neville Byford of Lovell White Durrant, who commonly act for
lenders and insurers against valuers, says "The decision will
obviously disappoint lenders because the House of Lords has not
upheld the Court of Appeal's decision. But valuers may still bear a
large part of the loss, particularly in cases where the negligent
valuation is far greater than the actual valuation".

Practical implications

The House of Lords' decision may well have broader application
beyond property valuations. In practice the key issue is likely to
be the distinction drawn between providing specific information and
general advice. This distinction is crucial to the scope of the
duty of care for potential losses.

There is often a fine line between the two. For example, an
accountant may simply value shares or give more general advice on a
share purchase transaction. If advice is only given in relation to
value, the accountant should state clearly that this is the case in
its terms of retention. This will help to avoid any inference that
it has undertaken a wider advisory role with a corresponding
extension of its duty of care for potential
losses.CJM